Joint study urges bold China-Australia treaty

Australia should enter into a treaty with China much like the post-war agreement with Japan if it wishes to deepen its relationship with Beijing and more than double trade over the next decade, according to a landmark study supported by both governments.

The report envisages an upgraded free trade agreement where Australian companies are given greater access to China’s fast-growing services sector and are used as a “test bed” for economic reform.

Such a proposal, just four days after the Turnbull government blocked bidders from China and Hong Kong from buying NSW’s biggest electricity network Ausgrid, goes against the prevailing sentiment in Canberra amid tension in the broader relationship.

“It is exactly at times like this that such a treaty would be most valuable,” said the report’s lead Australian author, Peter Drysdale, head of the East Asia Bureau of Economic Research at the Australian National University’s Crawford School of Public Policy.

“It would establish an external frame of reference for when there were problems in the relationship.”

Bigger picture

In outlining one of the biggest upgrades to the bilateral relationship since Australia recognised the Communist Party as the legitimate government of China in 1972, the report looks beyond the current tensions in the South China Sea and hostility towards Chinese investment in Australia.

It sees Canberra playing a lead role in moderating regional disputes between Beijing and its neighbours and envisages a longer-term scenario where Australia takes China by the hand and helps in its next stage of integration into the world economy and global institutions.

“This deeper partnership could become one of the most strategically vital and productive bilateral relationships that either country has,” the report says.

It would make Australia the only country to have a formal umbrella-style treaty with China.

“Such a treaty is a longer-term ambition … a 10-year ambition for the relationship,” said Mr Drysdale.

Former Prime Minister Kevin Rudd had a similar vision for the relationship early in his tenure, but was rebuffed by Beijing during a rocky period in the bilateral relationship. Diplomatic ties later stabilised, culminating in the signing of a “strategic partnership” under Julia Gillard in 2013.

But in recent years, the relationship has suffered from a lack of rapport among leaders and a public backlash against surging Chinese investment.

“Australia … must be careful not to squander the historic opportunities inherent in this fundamental reshaping of the financial geography of the region and the globe,” the report says.

“Seizing the potential benefits will require active engagement on Australia’s part with China on the latter’s financial opening rather than reactive policy-making or, worse, a turn towards protective economic nationalism.”

Timing issues

While it would be a big step for Beijing to align itself so closely with Canberra, the timing is arguably more difficult for Prime Minister Malcolm Turnbull, who has been re-elected with a slim majority in the House of Representatives and will have to deal with an array of independents in the Senate.

He will be in China next month for the G20 Summit, hosted by Xi Jinping in Hangzhou.

Despite being a Sinophile, Mr Turnbull is battling protectionist forces within his own government and on the cross benches as well as a growing wariness from the country’s security agencies.

These tensions flared last week with widespread opposition to the sale of Ausgrid to the Chinese state-owned enterprise State Grid.

Under the overhauled bilateral relationship outlined in the study, entitled “Partnership for Change: Australia-China Joint Economic Report”, the likes of State Grid would have more certainty in the approval process and potentially face fewer hurdles.

“The foreign investment regime should provide a clear line between sectors in which foreign investment is welcome … and those in which the government retains discretion,” it says.

“Australia should provide reliable access to Chinese investment though standardising the threshold for screening investments across all sources, including those from China, offering equal treatment to market-conforming state-owned enterprise investments, and moving from an ‘application and review’ to a ‘notification and compliance’ system under the Foreign Investment Review Board.”

The report, prepared by the East Asian Bureau of Economic Research, at the ANU and the China Center for International Economic Exchanges, suggests first upgrading the relationship to a “strategic partnership for change”, before beginning negotiations on a new investment agreement and then working toward a formal treaty to be signed within the next ten years.

“The new partnership will be a powerful force for the stability and prosperity of the region,” it says.

Trade benefits

While the report notes the alliance with the US does not preclude co-operation with China in “areas of shared interest” a formal treaty would likely be viewed in Beijing as a diplomatic victory in its ongoing quest to see Canberra adopt a less US-centric foreign policy.

Specific recommendations for boosting trade include co-operation between regulators from both countries to set up mutually recognised standards for food and healthcare products to promote sales into China via e-commerce channels. Australia could consider removing restrictions in domestic aviation to make international routes more attractive, which would benefit the broader tourism industry. And a better system for recognising professional services qualifications should be established.

As the report outlines these trade benefits would disproportionately flow to Australia.

It sees a scenario where exports to China could grow by 120 per cent over the next decade if Beijing allowed Australian companies to lead the opening up of its services sector.

By contrast, Chinese exports to Australia would grow by 40 per cent over the same period.

The big gains for Australia would be in winning access to areas such as financial services, transport and telecommunications which remain largely closed to foreign investors in China.

Private Chinese capital is also highly restricted in accessing these areas.

The study describes the upgraded free trade deal as an “Agreement on Investment” and recommends it be concluded before similar deals between the US and Europe.

Within the agreement would be provisions for a “negative list”, defining an enlarged area where Australian companies could make investments. It would also provide guarantees around access to resources and greater mobility for labour.

Closer ties

All these areas, along with concession towards Chinese state-owned enterprises, were briefly considered during negotiations around the free trade agreement, but considered too difficult.

If such an upgraded agreement was not reached, the study expects Australian exports to China would still increase by 72 per cent over the decade. This would drop to growth of 28 per cent if China’s annual economic growth fell below 5 per cent.

The study says the free trade deal, which came into effect in January last year, should provide the basis for upgraded diplomatic ties.

It cites the 1976 Basic Treaty of Friendship and Co-operation between Australia and Japan as an example.

Signed three decades after the Second World War, it defines areas of co-operation and enshrines principles around non-discrimination in economic relations.

“Since its signing, the Treaty … has provided the framework within which closer ties have forged,” the report says.

“The opportunity for evolving a similar framework to underpin the Australia-China relationship should not be passed up.”

The report believes such a treaty could be signed without compromising Australia’s security alliance with the US.

“I don’t think it cuts in any way across the relationship with the US,” says Allan Gyngell, director of the Crawford Australian Leadership Forum at the ANU and a former director-general of the Australian Office of National Assessments.

“China and Australia both have a series of historic relationships and strategic partnerships which will continue.”